A Lintner Model of Dividends and Managerial Rents

We develop a model where dividend payout, investment and financing decisions are made by managers who attempt to maximize the rents they take from the firm. But the threat of intervention by outside shareholders constrains rents and forces rents and dividends to move in lockstep. Managers are risk-averse, and their utility function allows for habit formation. We show that dividends follow Lintner’s (1956) target-adjustment model. We provide closed-form, structural expressions for the payout target and the partial adjustment coefficient. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment. Changes in corporate borrowing absorb fluctuations in earnings and investment.